Advanced Oncotherapy (AVO) LIGHTs up

I last looked at Advanced Oncotherapy (AVO) back in the Spreadbet Magazine days, having identified them as part of a crop of “speculative small caps that could be set to surprise on the upside in 2015”. Well, certainly haven’t disappointed in that regard, having soared from around 4p at the time of my original article to a peak of around 14p in April. They have since settled down to around the 8p mark, but the story isn’t over yet…

For the uninitiated, let’s remind ourselves of the AVO story. The firm has developed a new slant on the radiotherapy treatment currently used to treat around 60% of cancer patients worldwide. The continued challenge clinicians face is to deliver adequate amounts of radiation to the tumour while sparing non diseased, healthy tissue and vital organs like the heart, lungs, spinal cord, liver, bladder and kidneys. The advantage of sparing healthy tissue is to reduce the risk of secondary cancer from the treatment itself.

Advanced Oncotherapy’s focus is to develop advanced, cost effective and patient-friendly radiotherapy treatments which are clinically superior to those currently available. The company is a leader in affordable and accessible proton beam therapy which eliminates the need for a cyclotron or synchrotron which alone weigh in excess of 200 tons. This new technology is significantly smaller and thereby reduces capital expenditure, shielding requirements and running costs compared to other machines. Unlike x-rays, protons do not emit high doses of radiation when they travel through the body. Their killing power comes from the sharp falloff when they stop – this is known as the Bragg Peak.

AVO has exclusivity to the technology, SD-IORT, for early stage breast cancer which can also be used to deliver electronic brachytherapy in one or more doses (called fractions) to treat non-melanoma skin cancer, endometrial cancer, and rectal cancer. This mobile service provides therapeutic radiation treatments on demand with minimal toxicity to surrounding healthy tissue, without the complex handling, resource logistics and costs associated with using radioactive isotopes. The result is greater cost effectiveness and increased patient convenience.

The shares spike on Chinese deal…

On 25th March, AVO revealed that it had struck a $40 million deal with Sinophi Healthcare, who will install the LIGHT (Linac Image Guided Hadron Technology) proton therapy system in a hospital in China. The deal stipulates that AVO will install and maintain the LIGHT machine once it becomes operational. Sinophi also signed an exclusive 15-year agreement to become AVO’s first tier contributor for the LIGHT system in China and other Southeastern Asian countries.

This clearly switched a light on (terrible pun, I know) in the minds of investors, who bid the shares up to highs of 14p+ in the weeks following the news. However, AVO used the share price strength as an opportunity to raise fresh capital, via a placing at 8p per share to raise £20 million – not an inconsiderable sum for a company of this size, suggesting to me that this is one ‘blue-sky’ small cap the institutions are willing to back. The funds will be used to continue the development of its LIGHT system, with the first unit expected to be installed in Harley Street by the end of 2016 and first patient treatments expected in 2017.

But this is only the beginning…

On the back of the Chinese deal, house broker Westhouse proclaimed that “AVO is the best-positioned company in the world, in our view, to take advantage of Proton Beam Therapy becoming a more mainstream cancer treatment in the next five years, hence we are happy to reiterate our ‘buy’ rating.” Of course, being the house broker they would say that, wouldn’t they? However, there is considerable evidence to support this assessment.

The purchase of ADAM firmly established AVO as the most cost effective provider of 3-room treatment centres in a growing world market of proton therapy, which is expected to treble by 2018 and reach $2.5 billion by 2030. AVO has an order pipeline of c.£200+ million and an anticipated net profit margin of 10% on this potential future revenue stream. It has also won competitive tenders for 24 rooms out of a total of 33 Proton Beam Therapy rooms ordered worldwide. This is a 73% market share, which completely reverses the previous 20 years dominance by IBA which had installed 45 of the total 121 rooms built over that period. Interestingly, market penetration of Proton Therapy is still only less than 1% of all radiotherapy installations worldwide, so there remains vast potential for further significant growth. My take is that AVO will quickly become a takeover target for one of the large meditech companies. I would certainly not be looking to sell.

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